Recent Posts

The dominoes of debt are toppling in Europe, and there is no
way to stop the forces of financial gravity.

After 19 months of denial, propaganda and phony fixes,
the political and finance leaders of the European Union are
claiming a "comprehensive solution" will be presented by
Wednesday, October 26 — or maybe by the G20 meeting on
November 3, or maybe on Christmas, when Santa Claus delivers the
gift global markets are demanding: a "solution" that actually
pencils out and that forces monumental writeoffs of debt and thus
equally monumental losses on European banks and bondholders.

There have been any number of insightful descriptions of what's
going on beneath the artifice, spin and lies, for example:

I have summarized the fundamentals in this one graphic:
the European dominoes of debt. Simply put, there is no
way the EU authorities can stop the first domino — Greek default
or equivalent writedown of its impossible debt load — from
toppling the over-leveraged banks which will be rendered
insolvent when forced to recognize their losses.

That leaves each nation with the politically unsavory option of
bailing out its premier banks with taxpayer money, and squeezing
the money out of its citizenry via higher taxes and austerity.
That assumption of bank debt will in turn trigger downgrades of
heavily indebted sovereign nations such as France — moves that
will raise rates and make the bailout even more costly to
taxpayers, who will also be suffering from reductions of income
due to global recession.

Once the banks and bondholders accept a 50%–75% writedown in
Greek debt, then the other debtor nations will be justified in
demanding the same writedown in their crushing debts. This
dynamic leads to estimates that 3 trillion euros will be needed
to bail all the players out. Alternatively, total losses will
equal 3 trillion euros, wiping out banks and bondholders of
sovereign debt.

The German economy is simply not big enough to fund a 3
trillion-euro bailout. Germany has 81 million people and
its GDP is $3.3 trillion;
the EU GDP is roughly $16 trillion. Compare those with the U.S.,
with 315 million people and a GDP of around $14.6 trillion.

As an act of self-preservation, Germany will be forced to either
exit the euro outright or cloak its withdrawal with a "euro 1 and
euro 2" scheme, a scenario I first laid out in March 2010:
Why the Euro Might Devolve into
Euro1 and Euro2 (March 2, 2010). Other recent entries on the
end-state of the European debt crisis:

In any event, the last domino — the artifice of a single currency
— will fall one way or another.

It's important to understand that the supposedly
"prudent" economies of France, Germany, South Korea and Canada
are just as heavily indebted as the U.S. or "drowning in debt"
nations such as Italy. In the long view, is Germany's
load of 284% of GDP really that different from Italy's 313%? Yes,
the mix of debt is different, but the point is that all of
Europe, and indeed the developed world, is overloaded with debt:
state, bank and private.

The idea that leveraging more debt can resolve this gargantuan
over-indebtedness is beyond absurd. (Source: BusinessWeek)

It has recently come to light that in the worst-case
scenario (i.e. reality), "solving" Greece's debt crisis would
absorb the entire EFSF Rescue Fund's 400 billion euros.
By all accounts, every estimate of Greek tax revenue is
overstated, and every estimate of its expenses understated; Greek
GDP is collapsing. In all probability, the reality is worse than
anyone is willing to confess, which means this chart is already
outdated and hopelessly rosy:

Way back in August, the euro was reckoned to be 20% above fair
value of 1.15 to the U.S. dollar. Once the dominoes start
toppling in earnest, what will the euro's fair value be? Parity,
or perhaps even lower? Why hold euros when the end-game is
already visible?